Implications Of A Strengthening Dollar And Foreign Sales For S&P 500 Companies

In a recently released report by S&P Dow Jones Indices and authored by Howard Silverblatt, Senior Index Analyst, an analysis is provided for the sales generated outside the U.S. for S&P 500 companies. Although the reporting of foreign sales data is less than complete, S&P's report provides detail on the 239 companies that do provide foreign sales data. The report provides a comprehensive discussion on the companies used in the analysis with a snapshot provided below.

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A number of important facts can be gained from reviewing the report; however, one important factor is the impact of a strong U.S. Dollar on reported earnings for U.S. domiciled firms. We touched on the strong dollar issue in a recent post, September And Beyond, and a number of strategists highlighted this issue last week as well. The issue with a strong dollar is the negative impact on earnings when the foreign currency is converted back to the Dollar. The Dollar based company reports fewer dollars because of the Dollar's strength. A good example of this is Aflac (AFL).

In 2013 operating income for the company equaled $6.18 which included a $.76 reduction due to the negative impact of a weaker Yen, i.e., stronger dollar. In the company's second quarter 2014 10-Q, they include a table noting the potential impact of Yen currency moves relative to the Dollar.

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Also detailed in the S&P report is the foreign sales percentage by S&P 500 Index sector. Information technology, energy and materials are the three sectors with the largest foreign sales percentage.

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Additional detail is provided on specific companies that comprise the sectors and their respective foreign sales allocation.

Importantly, investors will want to evaluate where the foreign sales are generated. Some country currencies may actually trade stronger to the Dollar versus weakening. In total though, the fact the U.S. Federal Reserve is nearing the end of its QE program in October and the simultaneous desire by the European Central Bank to weaken the Euro, a further strengthening of the Dollar is likely. Currency moves are difficult to predict and currency volatility should be expected. For investors, understanding the potential currency impact for companies selling goods outside the U.S. and understanding any currency hedging at the company level, is an important variable at this point in the economic cycle.

Source:

S&P 500 2013: Global Sales Year in Review
S&P Dow Jones Indices
By: Howard Silverblatt, Senior Index Analyst
September 2014
http://us.spindices.com/documents/research/research-sp500-2013-global-sales.pdf?force_download=true